Copper ETFs In Focus: Five Ways To Play

by on December 5, 2011

Among investors interested in exposure to commodities, gold and crude oil tend to dominate most discussions; these natural resources are among the most widely traded in the world, and tend to account for the lion’s share of allocations to the “third asset class” in most long-term portfolios. But these two commodities are, of course, only the tip of the iceberg; there are dozens of resources that can be used as investable assets, ranging from dietary staples such as wheat and corn to raw materials used widely in construction such as timber and copper.

Copper is an interesting investment destination because the industrial metal is widely used in a number of applications, from pipes in new homes, in roofing and plumbing products, and in high tech industrial machinery [see Ultimate Guide To Copper Investing]. Many see copper as a leveraged play on the global economy; when spending is climbing and markets are thriving, demand for the raw material tends to climb [see Commodity Guru ETFdb Portfolio]. There is, of course, considerable risk to an asset with these characteristics; during the most recent financial crisis, prices plummeted as demand dropped dramatically.

Copper ETPs In Focus

For investors looking to bet on copper prices, exchange-traded products can be an efficient path to take. There are a handful of copper-focused ETPs that deliver cheap, efficient access to this industrial metal without requiring investors to use a futures account or to purchase massive amounts of the commodity.

iPath Dow Jones-UBS Total Return ETN (JJC)

iPath’s JJC is the oldest copper exchange-traded product on the market, offering investors an alternative way to tap into the world of copper futures contracts. This ETN is linked to the Dow Jones-UBS Commodity Subindex Total Return, an index comprised of a single futures contract on copper. JJC’s futures-based strategy results in the fund’s returns depending on not only the change in the metal’s spot price but also on the slope of the futures curve.

Because of JJC’s structure, investors are exposed to the potential credit risks inherent for all ETNs as well as the futures-based strategy drawbacks related to contago.

iPath Pure Beta Copper ETN (CUPM)

iPath’s relatively recent creation, CUPM, is an exchange-traded note that provides investors with exposure to copper futures contracts. This ETN utilizes a unique methodology called Pure Beta, which gives the fund flexibility to “roll” exposure into a number of different contract months. Unlike other futures-based ETPs that use a predetermined roll schedule, Pure Beta bases their decisions on observable price signals and the slope of the copper futures curve [see iPath Rolls Out 18 "Pure Beta" Commodity ETNs].

JJC’s unique methodology is designed to mitigate the impact of contago, which is an inherent drawback of futures-based products. The fund’s exchange-traded note structure does, however, expose investors to potential credit risk.

United States Copper Index Fund (CPER)

USCF offers investors a new type of copper ETF with their recent innovation, CPER. Unlike the existing copper products that are exchange-traded notes, CPER is structured as a publicly-traded limited partnership, which eliminates the fund’s exposure to the credit risks inherent in the ETN structures. The fund is designed to capture the performance of a portfolio of copper futures contracts fully collateralized with 3-month U.S. Treasury Bills [see Analyzing A Different Kind Of Copper ETF].

Similar to CUPM, CPER uses quantitative measures based on observable market prices at the end of each month to limit is exposure to the negative impacts of contago. Basically, when markets are in backwardation this ETF will pick futures contracts that maximize the potential benefits. When copper futures markets are contangoed, CPER will generally go further down the maturity spectrum to minimize the adverse impact of a “roll yield.”

First Trust ISE Global Copper Index Fund (CU)

CU takes an indirect approach to copper by investing in stocks of companies that are active in the copper mining industry. Because the profitability of these firms depends on the prices of copper, these stocks tend to exhibit a strong correlation to the metal’s spot price. CU’s equity approach allows investors to add copper exposure to their portfolios without having to encounter the drawbacks and nuances of future-based commodity strategies.

Since the portfolio’s underlying securities include companies that are involved in mining other metals, CU uses a modified linear weighting methodology to distribute the fund’s allocations based on each security’s revenue exposure to copper production. In other words, the portfolio of CU will generally include a number of broad-based mining companies whose operations and profitability may focus on gold, silver, or other metals.

Global X Copper Miners ETF (COPX)

Similar to CU, Global X Copper Miners ETF takes an equity approach towards achieving exposure to copper. COPX seeks to replicate the Solactive Global Copper Miners Index, which is comprised of common stocks, ADRs and GDRs of selected global companies in the copper mining industry. The fund tends to invest in “pure play” copper miners that concentrate exclusively on that metal, whereas CU holds a number of broad-based mining companies in its portfolio.

Disclosure: No positions at time of writing.